It is estimated that six million workers are going to benefit from a pay rise on 1 April 2016, when the National Living Wage (NLW) is introduced for those aged 25 and over. The current rate of pay for this age group is £6.70 an hour, meaning as an employer you need to find an extra 50p per hour, per worker over 25 years old. The NLW is an amendment to the earlier National Minimum Wage legislation, and you will face financial penalties if you fail to pay the statutory rates.
Whilst increasing productivity is going to be an important factor in managing the change within your business, that alone may not be enough. You will need to consider how you will offset the increase of wages against other costs. Options could include decreasing headcount, slowing recruitment and removing bonuses or overtime payments.
It’s not only the short term direct costs of the wage increase which you need to consider; there will be long term effects too. You will need to think about how the NLW increase will affect your overall wage structures. This may particularly affect you if you operate in the retail, hospitality and care sectors where supervisory wages may not be much higher than those of general staff. This, in turn, may have an adverse effect on recruitment, as you will need to pay higher wages to attract people with the required skills to stay competitive. A long term view will be essential as the government looks to increase the NLW to £9 per hour by 2020.
The most important thing you should be considering is how you will communicate the increase to your workforce. The change presents an ideal opportunity to educate your workers on the importance of efficiency, and why it matters now more than ever. It is likely you will depend upon discretionary effort from your workforce. Although many businesses will be operating a lean business model, it may be time to introduce a culture of continuous improvement to try and reduce waste. Communication will be key for this approach to be successful.
Another consideration will be the effect on auto-enrolment, not only due to employer contributions but also ensuring that those workers on salary sacrifice arrangements do not fall below the statutory rates of pay. Ensuring you do not fall foul of any wider legislation is also important if you have to take measures to reduce headcount, or change any contractual terms and conditions.
With 26% of employers stating that April 2016 is too soon for the increase to come into force and they will not be ready for the change, now is the time to consider what effect the NLW will have on your business and what measures you need to take.
If you would like any further information or assistance with how to manage the National Living Wage within your business then please contact Gemma Chapman or Vicky Webber in our HR team